{"id":8550,"date":"2026-02-11T17:15:59","date_gmt":"2026-02-11T23:15:59","guid":{"rendered":"https:\/\/www.blockadvisors.com\/resource-center\/?p=8550"},"modified":"2026-02-12T11:54:23","modified_gmt":"2026-02-12T17:54:23","slug":"what-is-cash-accounting","status":"publish","type":"post","link":"https:\/\/www.blockadvisors.com\/resource-center\/manage-your-business\/what-is-cash-accounting\/","title":{"rendered":"Small Businesses and Cash Basis Accounting: How it Works and When to Use It"},"content":{"rendered":"<div class=\"wp-block-image\">\n<figure class=\"alignright size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"250\" height=\"250\" src=\"https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2025\/05\/cash-based-accounting.jpg\" alt=\"man performing cash basis accounting\" class=\"wp-image-8551\" srcset=\"https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2025\/05\/cash-based-accounting.jpg 250w, https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2025\/05\/cash-based-accounting-150x150.jpg 150w, https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2025\/05\/cash-based-accounting-60x60.jpg 60w\" sizes=\"auto, (max-width: 250px) 100vw, 250px\" \/><\/figure>\n<\/div>\n\n\n<p>As a small business owner, you know that there are several choices you must make to determine how your business operates. One of these decisions is which accounting method your business will use. Two common accounting methods are accrual accounting and cash basis accounting. Here, we\u2019ll look at cash accounting, how it works, and the pros and cons of cash accounting for your small business.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-cash-accounting\">What is cash accounting?<\/h2>\n\n\n\n<p>In cash accounting, or cash basis accounting, payment receipts are recorded during the period in which they are received. Expenses are recorded in the period they are actually paid. In other words, in cash basis accounting, business revenue and expenses are recorded only when money is exchanged. That is, either when cash is received as revenue, or paid as expenses.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-types-of-businesses-use-cash-basis-accounting\">What types of businesses use cash basis accounting?<\/h2>\n\n\n\n<p>Cash basis accounting is relatively simple and straightforward. Many small businesses choose this method to avoid more complex <a href=\"https:\/\/www.blockadvisors.com\/small-business-bookkeeping-services\/\">bookkeeping<\/a>. Small businesses and <a href=\"https:\/\/www.blockadvisors.com\/resource-center\/small-business-tax-prep\/self-employed-taxes\/\">self-employed<\/a> individuals also tend to use cash based accounting because it gives a clear picture of how much money their business has on hand. Businesses must use the same accounting method for tax reporting and internal bookkeeping, so if you choose cash accounting <a href=\"https:\/\/www.blockadvisors.com\/small-business-tax-preparation\/\">prepare your tax return<\/a> accordingly.<\/p>\n\n\n\n<p>The Internal Revenue Service (IRS) allows cash based accounting in many circumstances. However, there are some business entities that are <strong>not allowed<\/strong> to use cash accounting. The IRS requires that any business with more than $31 million in gross annual receipts (ajusted annually for inflation) use the accrual method, which falls under Generally Accepted Accounting Principles (<a href=\"https:\/\/fasb.org\/standards\">GAAP<\/a>). Further, under the Tax Reform Act of 1968, <a href=\"https:\/\/www.blockadvisors.com\/resource-center\/small-business-tax-prep\/c-corp-tax-guide\/\">C corporations<\/a>, tax shelters, certain trusts, and partnerships with C corp partners are generally prohibited from using the cash accounting method. These guidelines are in place to prevent tax avoidance strategies that could arise from the cash method&#8217;s deferral of income recognition.<\/p>\n\n\n\n<p>However, there are a few exceptions. Primarily, that entities that meet the <em>gross receipts test<\/em> may still use the cash method. As of 2025, the gross receipts test as put forth by the <a href=\"https:\/\/www.irs.gov\/instructions\/i8990#en_US_202512_publink100088305\">IRS<\/a>, allows C corps and partnerships to use the cash method if the business&#8217; annual gross receipts are <strong>$31 million or LESS<\/strong> in the most recent three tax years. This is calculated by Adding gross receipts over the past the 3 tax years and dividing that total by 3. Tax shelters, as defined in <a href=\"https:\/\/uscode.house.gov\/view.xhtml?req=(title:26%20section:448%20edition:prelim)\">Section 448(d)<\/a>, are not included in this exception and may not use cash basis accounting. <\/p>\n\n\n\n<div class=\"wp-block-create-block-hrb-large-article-cta\" class=\"wp-block-create-block-hrb-large-article-cta\" style=\"background-color:#005d1f\"><div class=\"hrb-large-article-cta--image\" style=\"background-image:url(&quot;https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2021\/12\/bookkeeping-taxes-thumbnail.jpg&quot;);background-size:contain;background-position:center;background-repeat:no-repeat\"><\/div><div class=\"hrb-large-article-cta--copy #ffffff\"><h3 class=\"main-heading\">Bookkeeping for up to 50% less&nbsp;<\/h3><p class=\"main-copy\">Take the stress of bookkeeping off your plate&nbsp;<\/p><div class=\"quick-links-list-buttons\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/www.blockadvisors.com\/small-business-bookkeeping-services\/\">Learn more<\/a><\/div>\n<\/div><\/div><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-cash-basis-accounting-example\">Cash basis accounting example<\/h3>\n\n\n\n<p>Let\u2019s look at an example of cash accounting in action for a <a href=\"https:\/\/www.blockadvisors.com\/resource-center\/build-your-business\/start-a-landscaping-business\/\">small landscaping business<\/a>. We\u2019ll break it down by revenue and expenses:<\/p>\n\n\n\n<ol start=\"1\" class=\"wp-block-list\">\n<li><strong>Revenue \u2013 <\/strong>You mowed a client\u2019s lawn on June 10, 2024 and charged $200 for the service. The client pays you on June 20, 2024. Under cash basis accounting, you should record the $200 revenue on June 20 when you received the payment, not on June 10 when you mowed their lawn.<\/li>\n\n\n\n<li><strong>Expenses \u2013 <\/strong>Let\u2019s say you purchased $50 worth of fuel for your equipment and paid in cash at the gas station on June 15, 2024. With cash basis accounting, you should record the $50 expense on June 15, as that is when the money was paid.<\/li>\n<\/ol>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-cash-accounting-method-advantages-and-disadvantages\">Cash accounting method advantages and disadvantages<\/h2>\n\n\n\n<p>No matter the accounting method you choose, there will be pros and cons. Here are some common advantages and disadvantages to the cash method of accounting:<\/p>\n\n\n\n<p><strong>Advantages:<\/strong><\/p>\n\n\n\n<ol start=\"1\" class=\"wp-block-list\">\n<li><strong>Simple and straightforward \u2013<\/strong> Cash-based accounting is often considered more straightforward than other accounting methods. It only considers two factors: cash received and cash paid.<\/li>\n\n\n\n<li><strong>Easier maintenance \u2013 <\/strong>Keeping up with a cash accounting system is generally less involved than other methods like accrual accounting.<\/li>\n\n\n\n<li><strong>Single-entry accounting \u2013 <\/strong>Cash accounting is a single-entry system which doesn\u2019t often require a complex accounting program.<\/li>\n\n\n\n<li><strong>Cash flow visibility \u2013 <\/strong>Cash accounting gives you a more accurate picture of how much cash you have on hand. It can closely resemble a <a href=\"https:\/\/www.blockadvisors.com\/resource-center\/finance\/what-is-cash-flow\/\">cash flow<\/a> statement. It makes it easier to see where cash comes in and flows back out of your <a href=\"https:\/\/www.blockadvisors.com\/resource-center\/build-your-business\/open-a-business-bank-account\/\">business bank account<\/a>.<\/li>\n<\/ol>\n\n\n\n<div class=\"wp-block-create-block-hrb-large-article-cta\" class=\"wp-block-create-block-hrb-large-article-cta\" style=\"background-color:#005d1f\"><div class=\"hrb-large-article-cta--image\" style=\"background-image:url(&quot;https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2023\/11\/ba-hero-bookkeeping-category-1200x1200-1.webp&quot;);background-size:contain;background-position:center;background-repeat:no-repeat\"><\/div><div class=\"hrb-large-article-cta--copy #ffffff\"><h3 class=\"main-heading\">Bookkeeping for up to 50% less&nbsp;<\/h3><p class=\"main-copy\">Take the stress of bookkeeping off your plate&nbsp;<\/p><div class=\"quick-links-list-buttons\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/www.blockadvisors.com\/small-business-bookkeeping-services\/\">Learn more<\/a><\/div>\n<\/div><\/div><\/div>\n\n\n\n<p><strong>Disadvantages:<\/strong><\/p>\n\n\n\n<ol start=\"1\" class=\"wp-block-list\">\n<li><strong>Short-term indicator \u2013 <\/strong>Cash flow accounting provides good insight into your business\u2019s cash flow, but may not be a good indicator of long-term profitability. This method doesn\u2019t take into account other factors like the time it takes for transactions to go through, incurred expenses, and inventory on hand.<\/li>\n\n\n\n<li><strong>Single-entry accounting \u2013 <\/strong>While the simplicity of a single-entry system is beneficial, it also comes with disadvantages. Double-entry accounting (aka accrual accounting) uses accounting equations which may provide more standardized and accurate insights into the business\u2019s financial health.&nbsp;<\/li>\n\n\n\n<li><strong>Inaccurate picture of liabilities \u2013 <\/strong>Cash accounting might not provide an accurate picture of the liabilities that have been incurred but not yet paid for, so your business may seem better off than it actually is.<\/li>\n\n\n\n<li><strong>Tax consequences \u2013 <\/strong>Generally, a business can only deduct expenses recognized in the current tax year. So, with cash accounting, if your business incurs expenses in December 2025 but doesn\u2019t make payments against them until January 2026, you can&#8217;t claim a deduction for the fiscal year that ended in 2025. This discrepancy could affect your bottom line.<\/li>\n<\/ol>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-cash-vs-accrual-accounting\">Cash vs accrual accounting<\/h2>\n\n\n\n<p>Should you use cash or accrual accounting? The biggest difference between cash accounting and accrual accounting is <em>when<\/em> business revenues and expenses are recognized.<\/p>\n\n\n\n<p>With cash basis accounting, revenue is recorded when money comes in and expenses when bills are paid. Conversely, in accrual accounting, you record revenue when a sale is made whether or not the money is actually received yet. Likewise, you record expenses when goods or services are received, not when you pay for them. Learn more about <a href=\"https:\/\/www.blockadvisors.com\/resource-center\/small-business-services\/cash-vs-accrual\/\">cash vs. accrual accounting<\/a> and how to choose which method to use for your business.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-block-advisors-can-help-with-small-business-needs\">How Block Advisors can help with small business needs<\/h2>\n\n\n\n<p>We know that keeping up with your business books can be overwhelming. Get back to doing what you love and let our experts lighten your load, in person or virtually, year-round\u2014as always\u2014backed up by the <a href=\"https:\/\/www.blockadvisors.com\/guarantees\/\">Block Advisors guarantees<\/a>. See how our <a href=\"https:\/\/www.blockadvisors.com\/small-business-bookkeeping-services\/\">bookkeeping professionals<\/a> can help and answer any questions you may have. <a href=\"https:\/\/www.blockadvisors.com\/small-business-bookkeeping-services\/\">Schedule a free bookkeeping consultation<\/a>.<\/p>\n\n\n\n<p class=\"has-text-align-center\">______________________&nbsp;<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-large is-resized\"><a href=\"https:\/\/www.blockadvisors.com\/\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"256\" src=\"https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2021\/02\/image-1024x256.png\" alt=\"Block Advisors Logo - &quot;Built by H&amp;R Block&quot;\" class=\"wp-image-8257\" style=\"width:300px\"\/><\/a><\/figure>\n<\/div>\n\n\n<p>This article is for informational purposes only. The content may not constitute the most up-to-date information and should not be construed as legal advice.&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>As a small business owner, you know that there are several choices you must make to determine how your business\u2026<\/p>\n","protected":false},"author":1,"featured_media":8766,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":true,"footnotes":""},"categories":[1237],"tags":[],"class_list":["post-8550","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-manage-your-business"],"acf":[],"yoast_head":"<title>Understanding Cash Basis Accounting | Block Advisors<\/title>\n<meta name=\"description\" content=\"What is the cash accounting method? 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